Traits the Best Investment Strategies Have in Common

To gain our trust, an investing strategy needs more than one or two things going for it. It must meet the real criteria that serious investors demand. • Individual traders often don’t write down all of the features they expect before adopting a trading strategy. Quantifying these traits is one way we can increase the profits from any investing system we choose to follow.

Figure 1. It’s not enough for an investing strategy to promise high returns. Informed investors also require that financial formulas demonstrate good risk control, ease of management, and other important traits. Photo by Image Flow/Shutterstock.

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In Part 1 of this series, we saw that committed investors require just not one or two qualities, but at least a dozen different criteria before entrusting their life savings to any new trading strategy. These traits are not always clear in our minds when we’re evaluating heavily promoted financial models. In this series of articles, we previously examined the first six traits of great investing strategies — today, we’ll analyze the final six.

7. Free investing picks that are updated continuously. We saw in Point 6 that investors expect investing strategies to be fully disclosed. People no longer need to trust “black boxes.” Plenty of winning formulas are openly documented and free to use but continue to work year after year, because they exploit a known risk factor or a human behavioral bias. Since we require any formula we adopt to be free and open, there’s no reason you should have to compute it manually every time a trade is required. The method should be calculated for you at a free website, in a free email newsletter, or by some other means that the author provides — whether the picks are updated monthly, daily, or intraday.

8. No registration required. When we say a strategy must be fully disclosed and free of charge, “free” means truly free. A formula is not fully disclosed and free to use if the author demands your email address, requires a credit-card number, or imposes any other kind of registration requirement. Of course, it’s fine for an expert to offer additional features that cost money, such as specialized newsletters, books, or seminars that require optional payments. But the essential rules of the investing strategy itself should always be completely free — in every respect. With today’s computer power, ranking the securities that have the best odds of success is now so inexpensive that gurus must earn their money through genuine value-added services, not merely by posting lists of ticker symbols.

9. Years of use by actual people. You could conceivably adopt an investing strategy that some expert just discovered yesterday. But it’s not recommended. If a strategy would stop working a mere 5 or 10 years after it was first disclosed, that’s not a strategy you should entrust your life savings to. The best trading strategies continue to work even though “everyone knows about them” (no, they don’t) and despite the fact that a substantial number of people have started following them. These formulas continue to work, as we saw in Point 7, because they involve more risk than conservative investors want, or they are contrary to human behavioral quirks, such as herding. Require that any strategy you adopt have a track record with years of results by an actual community of followers.

10. Unlikely to become overgrazed. Many widely publicized market factors “wore out” and disappeared almost entirely within a few years after their first publication. For example, the well-known “value factor” comes into favor and then goes out of fashion for entire decades at a time. For the past 12 lo-o-ong years, growth stocks in the Russell 1000 have delivered almost double the gains of their mirror image, value stocks, as shown in a StockCharts PerfChart. Stick with rules that are truly persistent, using factors such as diversification and relative strength (aka momentum).

11. Same formula at all times. It’s hard enough to rank the securities that have the best odds of success in the coming period without a strategy also expecting us to time the market. The exact top and bottom of any market cycle can never be predicted with certainty. Any acceptable investing strategy employs the same formula at all times, during bull market and bear markets — and any sideways markets that come along in between. Obviously, a winning strategy can and should be sensitive to market conditions, “tilting” a portfolio away from declining assets and into rising ones. But making an investor call a top and a bottom is something that a strategy shouldn’t require.

12. No shorting or borrowing. It’s tempting to think that borrowing money could make an investing strategy more profitable. But debt is more likely to make your portfolio dive faster during a crash than you can deal with. As the Wall Street saying goes, “Bulls make money. Bears make money. Pigs get slaughtered.” Don’t be greedy. There are plenty of investing strategies that will multiply your money over the course of your life without exposing you to the risks of leverage.

In my own writing, I attempt to reveal long-term strategies that have market-beating returns, spare you from intolerable losses, and require no more than a few minutes a month to manage. I call these strategies “Muscular Portfolios,” but of course they also have many other names. My website gives away the picks of these portfolios, free of charge, updated every 10 minutes while the market is open.

I’ve summarized all 12 of the above traits in a table you can cut out and refer to whenever you like. I call these features “Strategy Sanity.” The list is shown below in Figure 2.

Figure 2. “Strategy Sanity” includes all of the features that informed investors require before they entrust their life savings to a new investing formula.

The financial-services industry is full of smooth-talking sharks who make a lot of promises but don’t deliver market-beating returns or protect you from heart-stopping crashes. Fortunately, the development of ultra-low-cost index funds — and the 21st-century technology to rank them — is giving investors new ways to profit without paying fees to anyone. More information is available in my one-page summary of muscular investing and at my website.

Announcement from the Author

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About the author:Brian Livingston is a successful dot-com entrepreneur, an award-winning business and financial journalist, and the author of Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk. He has more than two decades of experience and is now turning his attention directly on the investment industry. Based in Seattle, Livingston is now the CEO of MuscularPortfolios.com, the first website to reveal Wall Street's secret buy-and-sell signals, absolutely free.
He first learned computer programming on an IBM 360 in 1968 at age 15.
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